The softer-than-expected Canadian CPI report released should help convince some investors that the bar is high for the BoC to hike its policy rate in 2017. Firstly, total CPI fell by 0.4% m/m in November (consensus at -0.2% m/m), bringing down the year-over-year tally to 1.2%. We are tracking CPI inflation to average 1.5% in 2016Q4, below the 1.7% October MPR projection. Moreover, the three new main core inflation measures all softened by 0.2pp during the last three months:
The CPI-trim measure – excluding components which rates of change are located in the tails – moderated from 1.8% last August to 1.6% in November.
- The CPI-median measure – corresponding to the price change of the item located at the 50th percentile – slowed from 2.1% last August to 1.9% in November
- The CPI-common measure – a statistical measure tracking common price changes across all categories in the CPI basket – fell from 1.5% in August to 1.3% in November.
In summary, the BoC’s preferred core inflation measures decelerated and moved further away from the 2% inflation target (see chart below). Thus, the risk is tilted toward more easing – not hiking – even if the U.S. data released this morning were generally supportive for the three policy rate hikes signaled by the Fed’s new “dot plot” for 2017 (core durable goods orders were up by 0.9% m/m in November, real GDP advanced by 3.5% q/q saar in 2016Q3 and personal consumer spending was up by 0.3% m/m in November).
Contrasting with the CPI, the 1.1% m/m surge in Canadian total retail sales was stronger-than-expected by market participants (0.3% m/m). Robust growth was registered principally in the consumer staples segment (food, gasoline, clothing and general merchandise stores). Given the below-average income growth generated from the labour market, higher payments to low or middle-income families, coming from the new Canada child benefit, kept the pace of growth in disposable income at a respectable rate of 4.3% yoy in 2016Q3.
This appears to be the main driver behind the back-to-back surge in retail sales observed in September and October (see chart below). Finally, this robust retail sales report for the month of October is supportive of our expectation of a modest 0.1% m/m gain in real GDP for the same month (Statistics Canada will release the GDP report tomorrow morning).
